Demand + Supply (L8-9) Flashcards
Problem: how can we explain changes in price of goods and services?
Solution: develop a model that brings together 2 fundamental economic agents that determine the price of a good (consumers &producers)
Demand
Quantity of a good or service purchased at given price over a given time period.
Why is the public sector generally less efficient than the private sector?
Private sector faces competition which gives firms incentive to minimise costs and produce in an efficient manner because it increases the chance of them staying ahead of their rivals. Firms are motivated to earn profits.
According to classical and neoclassical economics, firms aim to maximise profit. What does this result in?
Firms aim to be as efficient as possible because it’ll minimise costs. This doesn’t apply to every good/service.
Profit equation
Total revenue-total cost
Law of demand
Ceteris paribus as the price of a good increases, quantity demanded decreases, conversely as the price of a good falls the quantity demanded rises.
A decrease in price results in…
An extension/expansion in demand
An increase in price results in…
A contraction in demand
Substitute goods
2 alternative products that could be used for the same purpose
Complement goods
Products used together
4 factors that can change demand
A change in age structure of the population
Change in income ( increase in income=increase in demand)
Advertising
Changes in consumer taste/preferences
Revenue
Income that a government or company receives
Total revenue
Price x quantity
Supply
Quantity of a good or service that firms are willing to sell at a given price over a given time period
Law of supply
Ceteris paribus as the price of good increases quantity supplied increases, conversely as the price of a good decreases quantity supplied decreases.
